*659 This proceeding arises upon the determination by respondent of a deficiency in petitioner's income and profits taxes for 1921 in the amount of $48,151.72.
The issues involved are (1) whether the Commissioner erred in including in petitioner's gross income for the calendar year 1921 the total amount of funds impounded by a receiver during the years prior to 1921, representing the earnings from certain oil lands the title to which was in dispute, and paid to the petitioner by the receiver in 1921; (2) whether the Commissioner erred in disallowing as a deduction from gross income the cost of 140 acres of oil land; *660 and (3) whether the Commissioner erred in failing to compute petitioner's excess profits tax for the year 1921 under the special assessment provisions of sections 327 and 328 of the Revenue Act of 1921.
FINDINGS OF FACT.
Petitioner was incorporated under the laws of California on May 19, 1914, with an authorized capital stock of 5,000,000 shares of a par value of 10*1275 cents a share, or $500,000. On June 6, 1914, petitioner acquired all the interest of an Arizona corporation, the Pan-American Oil Company, which it was organized to succeed, in certain oil lands and all other property of the Pan-American Oil Company in exchange for 4,650,758 shares of petitioner's stock. Petitioner further assumed all the debts of the Arizona corporation.
The oil lands so transferred consisted of several tracts amounting to 140 acres in all, 80 acres in the northeast quarter and 60 acres in the southeast quarter of section 32, township 12 north, range 23 West, San Bernardino Base and Meridian, lying in Kern County, California. On the 60-acre tract lying wholly in the southeast quarter oil had been struck at this time.
On September 27, 1909, the President of the United States ordered the withdrawal and reservation of all of certain lands, among which were the lands later acquired by the petitioner from mineral exploration and from all forms of location, settlement, selection, filing, entry or disposal under the mineral or non-mineral public land laws of the United States (known as the Taft Withdrawal Order). On July 2, 1910, the President, under the Act of*1276 Congress approved July 25, 1910, entitled "An Act to authorize the President of the United States to make withdrawal of public lands in certain cases" (36 Stat. 847), duly and regularly ratified, affirmed and continued in full force and effect the order of withdrawal and reservation of September 27, 1909.
On February 27, 1913, a suit in equity was brought by the United States of America in the District Court of the United States for the Southern District of California, Northern Division, Ninth Circuit, entitled, "United States of America, Plaintiff, vs.American Oilfields Company, Ltd., et al. [including the Pan-American Oil Company and Maricopa Consolidated Oil Company, predecessors of the Trojan Oil Company], Defendants," and numbered on the files of the court as "In Equity, No. A-3."
This suit was brought to have it adjudged that the defendants had no title or interest to the land lying in the southeast quarter of section 32 mentioned above, which was covered by the Taft Withdrawal Act, and to secure an injunction restraining the defendants from trespassing on said property or extracting oil therefrom, and *661 for an accounting for oil and gas previously extracted*1277 therefrom. The land of petitioner involved in this cause was the 60-acre tract lying wholly in the southeast quarter and constituted only a part of the property which petitioner acquired in exchange for its stock.
In this suit one A. E. Campbell was, on April 23, 1915, appointed receiver of the properties claimed by plaintiff, and was thereafter succeeded by Howard M. Payne, who was appointed receiver on May 15, 1915, and who in turn was succeeded by Louis F. Byington, who was appointed receiver on October 25, 1918. Under the court's order of April 23, 1915, appointing a receiver, the receiver was given power and directed to operate any oil or gas well or wells on the property, or to permit them to be operated by the respective defendants then in possession of or operating them, or, at his discretion, to close the wells. He was directed to ascertain the quantity of oil and gas theretofore extracted by the defendants and to keep an accurate account of all oil and gas thereafter produced by the lands and to sell the oil and gas for the best price obtainable. For the purpose of protecting and operating the property, the receiver was authorized to incur such expense as was necessary. *1278 All moneys coming into the hands of the receiver were, unless otherwise directed by the court, to be deposited in a bank or banks to be selected jointly by the receiver and the defendants, who claimed the money, or their respective solicitors of record and the solicitor for the complainant, and such moneys were to be paid out only upon checks signed by the receiver and by the solicitors of record, unless otherwise ordered by the court.
This suit came to trial before the District Court, which, on August 21, 1916, entered its decree, holding:
1. That the Plaintiff was, on and for a long time before and has ever since the 27th day of September, 1909, been and now is, the sole owner in fee simple absolute of all of the land involved in this cause and described as the Southeast Quarter of Section thirty-two (32), Township twelve (12) North, Range twenty-three (23) West, San Bernardino Base and Meridian, and of all petroleum oil, gas and other minerals therein, or heretofore extracted and produced therefrom;
2. That the said land was on the 27th day of September, 1909, and has been at all times since that date and now is, lawfully and fully withdrawn from all forms of location, *1279 settlement, selection, filing, entry or disposal under the mineral or non-mineral public land laws of the United States, and was not then and is not now subject to exploration, location or acquisition under any of said public land laws;
3. That the said Defendants, and each of them, have not had at any time, and have not now, any estate, right, title or interest whatever in or to said lands, or in or to any petroleum oil, gas or other minerals therein or heretofore extracted and produced therefrom, through or under any lawful and valid mining claims, mining locations or notices thereof, or otherwise; and the title of the Plaintiff thereto is good and valid; and any and all claims, rights, titles and interests heretofore and now asserted by the said defendant, or any of them, in and to said lands, or in and to any petroleum oil, gas or other minerals in said lands or heretofore extracted and produced therefrom, are invalid * * *. and *662 directing that plaintiff's title be quieted as against the defendants and appointing a master who should report upon any and all improvements made by the defendants and any injuries to the land done by them, and give an accounting for the*1280 value of the oil and gas extracted therefrom by them.
The interlocutory decree was made final December 24, 1919, adjudging and decreeing that the plaintiff, the United States, was the owner of the southeast quarter of section 32, and quieting the title of the plaintiff as against said Trojan Oil Company and all other defendants to the action. Thereafter, on February 3, 1920, an appeal was allowed from this final decree to the United States Circuit Court of Appeals for the Ninth Circuit. The judge in the United States District Court made an order adjudging and decreeing that the property of the Trojan Oil Company and wells and other improvements thereon should remain in the possession of the receiver during the pendency of the appeal, and authorizing the receiver to continue the operation and management of the property until further order of the court.
While the appeal was pending in the Circuit Court of Appeals, Congress passed what is known as the Oil Land Leasing Act, which was approved February 26, 1920 (41 Stats. 437; U.S. Code, Ann., title 30, sec. 227). Under section 18 of this leasing act claimants of withdrawn lands were granted the right to apply for a lease to the*1281 properties claimed within six months after February 25, 1920, provided that they first relinquished to the United States all right, title and interest claimed in the property.
The petitioner relinquished all its right, title and interest in the 60-acre tract in the southeast quarter of section 32 to the United States Government on August 18, 1920, and on the same day it made and executed its application to the Secretary of the Interior of the United States for a lease upon this tract. After consideration of this application by the Secretary of the Interior, a lease was granted to the petitioner as of August 18, 1920, but actually executed by the parties on January 6, 1921. The lease covered only the 60 acres lying wholly in the southeast quarter which had been in litigation in the suit mentioned above.
The mandate of the Circuit Court of Appeals filed in this proceeding on January 17, 1921, after hearing, recited the fact that petitioner had quitclaimed the property in question, "East one-half (E 1/2) of the Southeast Quarter (SE 1/4) of the Southeast Quarter (SE 1/4) and the Northeast Quarter (NE 1/4) of the Southeast Quarter (SE 1/4) of Section Thirty-two (32), Township Twelve*1282 (12) North, Range 23 West, San Bernardino Base and Meridian, Kern County, State of California"; that it had been granted a lease thereof by the United States under the leasing act; and that the *663 amount to be paid to the United States by the petitioner for past oil and gas production up to August 18, 1920, was the principal sum of $121,681.15; and then ordered the court below to enter a decree disposing of the moneys impounded in the hands of the receiver in a manner specified. In pursuance of the direction of the Circuit Court of Appeals, the District Court entered its decree in accordance with the mandate, ordering that the receiver pay to the Federal Reserve Bank of San Francisco, in cash and Liberty bonds, $121,681.15, with interest at the rate of 4.46 per cent per annum from August 18, 1920, to date of payment; and deliver over to petitioner the tract in question, together with all personal property thereon, to be accepted by petitioner under the lease, and pay over to petitioner all money and Liberty bonds impounded, save $20,000 to be held until the receiver's final settlement of his account. This decree was entered and recorded on January 18, 1921.
Thereafter, *1283 the receiver delivered the property and paid over the impounded funds as directed in the decree of the court. The total funds paid over by the receiver in 1921, including the amounts paid as royalty to the Federal Reserve Bank in accordance with the decree, amounted to $782,004.48. Of this amount, $19,961.57 represented the total of small allowances which petitioner had received from the receiver during the years 1916 to 1920, inclusive, for administrative purposes.
Under orders of the court practically all of the impounded funds had been invested in Liberty bonds and the interest on such bonds had been reinvested in other Liberty bonds. Liberty and Victory bonds of a face value of $750,000 were thus acquired and were turned over to petitioner as part of the $782,004.48.
From the time of the inception of the receivership to October 25, 1918, the date of the appointment of Byington as receiver to succeed Payne, and from October 25, 1918, to June 21, 1921, the receivers accumulated gross proceeds from oil sales and incurred expenses as follows:
| Year | Gross oil | Expense | Net |
| sales | amount | ||
| impounded | |||
| 1915 | $18,636.43 | $4,543.00 | $14,093.43 |
| 1916 | 177,726.75 | 43,324.45 | 134,402.30 |
| 1917 | 238,351.57 | 58,102.96 | 180,248.61 |
| 1918 | 244,236.17 | 59,538.66 | 184,697.51 |
| Total | 678,950.92 | 165,509.07 | 513,441.85 |
| Oct. 25, 1918, to July 31, 1920 | 312,804.25 | 118,143.17 | 194,661.08 |
| Aug. 1, 1920, to Dec. 31, 1920 | 27,433.29 | 26,222.16 | 1,211.13 |
| Jan. 1, 1921, to June 21, 1921 | 11,765.90 | 21,507.70 | 1 9,741.80 |
| Total | 1,030,954.36 | 331,382.10 | 699,572.26 |
*664 In addition to the above, the Mercantile Trust Company, the depositary of the impounded funds, invested interest on securities held by it, such interest amounting as follows:
| For period Oct. 25, 1918, to July 31, 1920 | $40,000 |
| For period Aug. 1, 1920, to Dec. 31, 1920 | 17,500 |
| Total | 57,500 |
Petitioner included in gross income for 1921 the total amount received from the receiver. Administrative expenses incurred during the period of receivership, which had been paid out of advances made by stockholders and by the receivers in the amount of $19,961.57, were claimed and allowed as deductions in the return for 1921. The petitioner also deducted in that year a property loss of $572,805.06 (property loss $548,946.18, plus $23,858.88 additions and betterments) which it alleged represented the interest relinquished to the United States Government under the lease in August, 1920. Depletion and depreciation sustained during the period of the receivership were claimed as deductions in the return. Petitioner determined a loss for the year of $345,359.86.
The property loss was disallowed by the respondent and changes were made in the amount*1285 of depletion and depreciation allowable, the amount allowed, however, being the depreciation and depletion sustained during the period of receivership as computed by the respondent. A taxable net income was determined by respondent for 1921 of $151,403.71.
Petitioner earned no income during the receivership and no record was made on petitioner's books of the income impounded by the receiver. The receipt of the impounded funds was recorded on its books in 1921. No depreciation or depletion was charged on the books from the organization of the corporation to December 31, 1920.
OPINION.
MATTHEWS: The petitioner contends that the impounded funds received in 1921 were at no time income to it nor taxable to it as such, but were income to the receiver as fiduciary and should have been returned as such by him in the years of their receipt; that if they were income to petitioner they were accrued on August 18, 1920, when it released to the Government its right, title and interest in the lands and applied for a lease under the Oil Land Leasing Act of February 25, 1920; and that the impounded funds constituted a gift by the Government to petitioner under a remedial statute, and, as*1286 such, are nontaxable. If the first point should be decided against it, the petitioner contends that the relinquishment of its claim was a loss which is allowable as a deduction in 1921 and that it is entitled *665 to special assessment for 1921 under sections 327 and 328 of the Revenue Act of 1921, on the ground that its net income for that year is abnormally high, owing to the realization in one year, by the receiver's payment of the impounded funds, of income earned during a period of years.
The receiver from whom the impounded funds were received was in possession of only 60 acres of the 140 acres acquired by petitioner from the Pan-American Oil Company in 1914. The other 80 acres were a part of the lands included in the Taft Withdrawal Act of September 27, 1909. There is no evidence as to the disposition of petitioner's claim to the 80 acres.
Since the hearing in this case, the Supreme Court, in , has passed on the first question involved in this proceeding. In that case, as here, the Government brought suit to oust the company from possession of certain oil lands embraced in the Taft Withdrawal*1287 Act of September 27, 1909, and a receiver was appointed in 1916. Funds derived from the proceeds of oil were impounded by the receiver during that year. The District Court, in 1917, dismissed the suit of the Government and ordered the funds impounded by the receiver to be released to the claimant and they were so released in 1917. The petitioner contended there, as here, that the funds were taxable income to the receiver in the year 1916, when they were earned; that, if not returnable by the receiver, they should have been returned by the company for 1916, because they constituted income of the company accrued in that year; that, if not taxable as income of the company for 1916, they were taxable as income for 1922, since the litigation was not terminated in its favor until 1922. The court held:
First. The income earned in 1916 and impounded by the receiver in that year was not taxable to him, because he was the receiver of only a part of the properties operated by the company. * * *
Second.The net profits were not taxable to the company as income of 1916. For the company was not required in 1916 to report as income an amount which it might never receive. See *1288 . Compare ; . There was no constructive receipt of the profits by the company in that year, because at no time during the year was there a right in the company to demand that the receiver pay over the money. Throughout 1916 it was uncertain who would be declared entitled to the profits. It was not until 1917, when the District Court entered a final decree vacating the receivership and dismissing the bill, that the company became entitled to receive the money. Nor is it material, for the purposes of this case, whether the company's return was filed on the cash receipts and disbursements basis, or on the accrual basis. In neither event was it taxable in 1916 on account of income which it had not yet received and which it might never receive.
*666 Third.The net profits earned by the property in 1916 were not income of the year 1922 - the year in which the litigation with the Government was finally terminated. They became income of the company in 1917, when it first became entitled*1289 to them and when it actually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See . Compare . If in 1922 the Government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year. Compare
Although in the instant case more than one year's earnings were impounded and the litigation was decided in favor of the Government, we think the decision in the North American Consolidated case governs in this case. Since the receiver in the instant case did not hold all the petitioner's property, the earnings impounded each year were not taxable to him.
*1290 The reasoning of the court as to the second and third points also applies with equal force here. The petitioner in the instant case claimed an interest which was very doubtful and was in litigation. A receiver was appointed by the District Court in 1915. That court made its decree final in 1919, adjudging that the Government's title was sound and that petitioner's title was invalid. Thereafter, petitioner appealed, but before judgment was given by the Circuit Court, petitioner entirely relinquished and abandoned all claim to right, title and interest in the land, and applied on August 18, 1920, for a lease under the Leasing Act of Congress of February 26, 1920. This application was finally accepted by the Government and a lease executed on January 6, 1921, effective as of August 18, 1920. A few days later, on January 17, 1921, the Circuit Court decreed the release to the petitioner of the impounded funds (less the Government's royalty reserve under the lease) and the receiver of the District Court, in obedience to its mandate, released this sum and paid it over to the petitioner. It appears clear, therefore, that not until 1921, when the application for the lease was approved*1291 by the Government, and the Circuit Court entered its decree, did the petitioner have any right or title of any sort in these impounded proceeds of oil sales. Moreover, its right perfected in 1921 was not that which it had originally asserted against the Government in the pending suit, but was a new and completely independent right arising not to itself as a rival claimant, but from its new position as lessee of the Government. Such a right as petitioner had, therefore, could not have accrued until 1921, when the lease was approved by the Government *667 and executed. On these facts we can entertain no doubt that the impounded funds were income to petitioner in 1921, when its right under the lease was perfected. It so happened that the impounded funds were paid over to it in the same year, 1921. It will be seen, therefore, that, whether the petitioner was on the cash or the accrual basis, our decision in the circumstances would be unaffected by that fact.
We are not unaware of the decision of the District Court (S.D.Calif.) in *1292 , in which, under circumstances very closely analogous to those here present, that court decided that such proceeds might be returned as income by the taxpayer for the several years in which the sales were made prior to 1920. Certain facts are present in that case which may afford a ground for distinction, but if it be supposed that the court in that case intended to lay down a general rule upon the retrospective effect of the Act of February 26, 1920, we think it has been overruled by the Supreme Court's decision in , applying as it did, the principle of .
The petitioner further contends that the Act of Congress of February 26, 1920, was a remedial statute and that the impounded funds paid over to the petitioner on the granting of the lease were, therefore, not income to the petitioner, within the definition of , but constituted a nontaxable gift by the Government to the petitioner. Petitioner cites in support of this reasoning the decision of*1293 the Secretary of the Interior in the case of Honolulu Consolidated Oil Co., 48 Lane's Decisions, 303, in which section 18 of the statute in question is referred to as a "remedial section"; and ; ; , on the supposed analogy of Government grants of homesteads and mining patents on lands or of Government railroad subsidies. We do not find any analogy in these cases. Even if we should go so far as to concede that the lease was a gift from the Government to the petitioner, the value of that lease is not here in issue, but the income earned under it (in prior years but reached by its retroactive effect). To allow the exemption of income so earned prior to 1920 would logically require the exemption of all subsequent income - a reductio ad absurdum of the whole proposition.
There remain the two alternative contentions of the petitioner which may be very shortly disposed of. It is argued that the petitioner suffered a loss, admittedly in the year 1920, when the petitioner relinquished and quitclaimed all its right, *1294 tile and interest in the 60-acre tract to the United States Government; that the amount *668 of this loss was that charged off on its books as the cost of the whole property, $572,805.03 ($23,858.85 representing "additions and betterments"); and that the loss, although sustained in 1920, should be allowed in 1921 by way of reduction of the payments made to the petitioner in that year by the receiver, who then released the impounded funds. There are several fatal objections to this argument.
On the evidence, it is impossible to say precisely what the interest acquired in 1914 cost the petitioner. Neither do we know what became of petitioner's claim to the 80 acres. There is a very grave question whether the petitioner had any legal interest whatsoever in the oil lands themselves in 1914, or at any time, until it acquired such an interest as a lessee in 1921. The United States District Court very plainly held in its decree of December 24, 1919, that the petitioner had no interest in the 60-acre tract, and although this cause was appealed by the petitioner, and was, of course, subject to reversal in the upper courts, petitioner's subsequent action in applying for a lease*1295 from the Government and quitclaiming its rather shadowy interest, indicates rather plainly the petitioner's own view of the value of that interest.
In the second place, whatever the petitioner paid for its interest in the 60-acre tract must now be regarded as the cost to it of the Government's lease, which otherwise would have to be regarded as without cost. The petitioner's interest as lessee was substantial and clear at law, whereas its prior claim was, as we have said, very questionable.
In these circumstances, we can not find that petitioner suffered the loss claimed in 1920. The argument that such a loss, if found, should be allowed against the respondent's payment of impounded funds in 1921, is answered by the Supreme Court's decision in
This brings us to the petitioner's final contention, that, by reason of the abnormality in its 1921 income resulting from the payment to it in that year of moneys earned in fact in the six previous years, it is entitled to special assessment under sections 327 and 328 of the Revenue Act of 1921.
In Law Opinion 1109, C.B.I-2, p. 253, at 256, the Commissioner said:
It is my*1296 opinion that the following represent the typical and common cases in which there is present an abnormal condition affecting capital or income of a corporation: * * * (4) where the net income for the year is abnormally high, due to the realization in one year of (a) income earned during a period of years, or (b) extraordinary profit derived from the sale of property the principal value of which has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, or (c) gain derived in one year from *669 the sale of property the increase in value of which had accrued over a period of years; and (5) where proper recognition or allowance can not be made for amortization, obsolescence, or exceptional depletion due to the World War.
In this opinion the Commissioner was interpreting sections 327 and 328 of the Revenue Act of 1918, which were reenacted by Congress without change in the Revenue Act of 1921.
The respondent resists this contention by suggesting that under the rates of the Revenue Acts of 1917 and 1918, if the moneys later 1919 and 1920, the tax would greatly exceed the excess-profits tax paid by the petitioner in 1921; and that consequently*1297 no abnormality in income existed in 1921. We can not follow the logic of this argument.
We are of the opinion that an abnormality of income existed here which would entitle petitioner to the benefit of the relief provisions. The facts speak for themselves. The logical inconsistency in regarding as "income earned during a period of years" the sums paid petitioner under the lease in 1921, although before 1921 the petitioner had no valid legal claims to the proceeds of these oil sales, is offset by the practical consideration that under the leasing act petitioner acquired a new legal right which applied retroactively; so that the petitioner must be regarded, for this purpose only, as having earned in the several prior years the sum to which it became entitled and received in 1921.
The situation in the present case is somewhat similar to that in , where we held the taxpayer's income abnormal in 1919, by reason of the fact that it returned in that year income earned in 1919 from the sale of its salmon pack of that year and also income resulting from the sale in the same year of 80 per cent of its 1918 pack which had been commandeered*1298 for food purposes by the United States Government in the prior year and released only after termination of the late war. We said:
Certainly this situation, resulting as it did in practically throwing two years' income into the year 1919, was not one occurring in the ordinary course of business.
Cf. ; .
It may be noted that the case of , in which the Board reached an opposite decision on facts somewhat similar to those in the Red Salmon Canning Co. case, the sale in a subsequent year of goods impounded by a foreign country through the war period, is clearly distinguishable on the ground of insufficient evidence in the latter case to show any resulting abnormality.
*670 We hold, therefore, that the amount of the funds released by the receiver to the petitioner in 1921 is income to it in that year, but that the petitioner should be allowed the relief afforded by the Revenue Act of 1921 in the matter of special assessment for that year.
Reviewed by the Board.
Further proceedings may be had under*1299 Rule 62(c).
Footnotes
1. Loss. ↩